Jumbo Home Loan

By: EconomyWatch Content   Date: 15 December 2009

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The interest rate on a Jumbo Home Loan is slightly higher than loans with lesser value simply because there is greater risk involved. The loan amount in this case exceeds the conforming loan limits set by the federal housing authority, namely, the Office of Federal Housing Enterprise Oversight (OFHEO).

 

Jumbo home loans are not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. The OFHEO sets the conforming loan limit size on an annual basis. 

Features of Jumbo Home Loans

The large size of jumbo home loans makes them slightly different from the conventional loans.

 

Listed below are some basic features of such loans:

ü      These loans are generally taken for the purchase of high value properties.

ü      The average interest rates on such loans are higher than that of the conforming loans.

ü      These loans involve greater risk for lenders.

ü      These loans involve higher down payments.

ü      Such loans generally require two appraisals from the lender.

ü      In case of defaults, it is difficult to sell a luxury residence quickly for a full price.

ü      The refinancing cost of these loans is high. 

Jumbo Home Loan and Higher Interest Rate: Reasoning

The two government affiliated agencies Fannie Mae and Freddie Mac purchase the bulk of the US residential mortgages from the various lenders and then resell them to professional investors. These mortgages are then traded in the markets in the same way as the stocks. In the case of a jumbo home loan, it is difficult to sell such a loan to investors and the markets for it are limited. For this reason, the lenders charge more interest on this type of loans to ensure that they are profitable.

 

Currently, any mortgage loan above $417,000 attracts the status of a jumbo home loan and carries a higher interest rate. Those who plan to borrow sums of money that are close to the jumbo limit prefer to avoid the jumbo rates. They can do so by taking two different mortgage loans.

 

A borrower can take a first mortgage for the bulk of money required to buy a home and a second short term mortgage. Although the interest rate on the short term mortgage will be higher, it can be paid off in a short time.

 


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